An asymptotic expansion for forward-backward SDEs: a Malliavin calculus approach (Forthcoming in Asia-Pacific Financial Markets)

Akihiko Takahashi and Toshihiro Yamada
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Akihiko Takahashi: University of Tokyo
Toshihiro Yamada: Hitotsubashi University

No CARF-F-394, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes a new analytical approximation scheme for the representation of the forward-backward stochastic differential equations (FBSDEs) of Ma and Zhang (2002). In particular, we obtain an error estimate for the scheme applying Malliavin calculus method for the forward SDEs combined with the Picard iteration scheme for the BSDEs. We also show numerical examples for pricing option with counterparty risk under local and stochastic volatility models, where the credit value adjustment (CVA) is taken into account.

Pages: 27 pages
Date: 2016-09
New Economics Papers: this item is included in nep-sea and nep-sog
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